Risks of a HUD Foreclosure

The risks associated with HUD Homes are similar to that of typical foreclosure properties.

The federal government, through the U.S. Department of Housing and Urban Development (HUD), acquires foreclosed residential properties that were initially bought with a federally insured loan. These are called HUD Homes and offer potential buyers the opportunity to purchase property at a significant discount. HUD Homes also provide the benefit of up-to-date market values, since the agency charged with inventory commissions regular appraisals. HUD Homes can be bought by anyone with the means to pay cash or obtain a mortgage, though preference is first given to owner-occupants. Still, HUD Homes come with risks, just as any foreclosed property would.

Bad Location

As with any foreclosure, HUD Homes may be located in less-than-desirable neighborhoods. The potential upside is that these neighborhoods may be undergoing a revitalization period, which would make the property a worthwhile investment. Otherwise, potential homeowners should take care to do their research regarding the location, quality of schools, crime rate, public amenities and proximity to transportation. A house located on the edge of a bad neighborhood but within the bounds of a good school district may soon find its value rising over the years. Proximity to public transportation or main roads is another significant perk that future homeowners or renters may find valuable, while a house close to a police station may help keep crime at a safe distance.

Poor Condition

Most HUD Homes are in significant disrepair and, unfortunately, are sold in “as-is” condition. While HUD does not guarantee the conditions of its inventory and is not obligated to pay for any repairs, buyers can inquire about the FHA Rehabilitation Loan offered through HUD. Buyers seeking to acquire property in need of repair and renovation are typically required to obtain construction financing in addition to an acquisition loan. Construction loans generally come with a higher interest rate and shorter payoff terms. The FHA Rehabilitation Loan serves this need by combining the construction and acquisition loan into one long-term fixed-rate (or adjustable-rate) mortgage.

No Direct Financing

Generally, banks will offer concessions on financing to potential buyers of bank-owned properties. These concessions may include a reduction in the mortgage interest rate or a lower down payment. However, HUD does not provide direct financing. Potential buyers must have sufficient cash or qualify for a mortgage before bidding on a HUD House. Buyers should also consult with a mortgage lender about eligibility for an FHA-insured loan or other federal mortgage programs. These loan programs may allow buyers with bad credit or a history of foreclosure or bankruptcy to obtain a home loan, thanks to less stringent credit requirements compared with conventional mortgages. FHA loans also require a lower down payment, which is particularly advantageous for potential homeowners with insufficient cash reserves.

About the Author

Shayne Arcilla has over four years of real estate industry experience and has published in industry journals such as "The Wharton Real Estate Review." She graduated from Penn State with a Bachelor of Science in finance and a minor in economics.